Author Topic: KHC - Kraft Heinz Co.  (Read 23460 times)

vince

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Re: KHC - Kraft Heinz Co.
« Reply #50 on: April 17, 2018, 07:04:29 PM »
I believe it may be short sighted to think that they can't grow organically again.  I think they definitely will which would maybe help them use the stock as currency again.  However, I dont believe they absolutely have to use a significant amount of stock to do another acquisition.  Last time I checked there was a certain individual with lots of ready cash laying around which gives them alternative ways to structure financing.   I dont own a position here so I have no dog in this race but I think some investors quickly come to conclusions in error.  First, there are many ways to create value, you do not need organic growth.  In fact, by not having organic growth possibly opens up the door for large repurchases at attractive prices.  If I had a position I would prefer organic growth (assuming it was profitable) but as an investor my best performing investment (in dollars and percentages) by a wide margin was in a business with no unit growth and the almost certainty of long, and steady shrinkage.  Additionally, I see widespread negativity directed at businesses where acquisitions are relied upon to create value.  I actually think, with this mgmt team anyway, that value creation opportunities are more certain and more valuable than many businesses that grow nominally with GDP but need to tie up lots of incremental cash to do it.  Just because there have been lots of blow-ups with this strategy, doesnt mean they are all bad.  I cant help but sense that frustration with the stock price is to blame and if I bought this at 80 bucks I wouldnt be happy for sure.  But I certainly wouldnt be throwing in the towel here and claiming that they are sure to fail and the model is broken etc etc.  I am surprised that people arent instead talking more about the opportunity here with this all star board, 3G management, Buffett's backing and the history of success of all these actors. 


Contra123

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Re: KHC - Kraft Heinz Co.
« Reply #51 on: April 17, 2018, 07:36:09 PM »
I think they definitely will which would maybe help them use the stock as currency again.  However, I dont believe they absolutely have to use a significant amount of stock to do another acquisition.
Right. Depends on the size of the M&A target. Historically, 3G's pattern was to focus on larger targets, and stock was generally part of the consideration (Heinz for Kraft; ABI for SABMiller; InBev for Anheuser-Busch).

Last time I checked there was a certain individual with lots of ready cash laying around which gives them alternative ways to structure financing. 
If Berkshire puts in equity, that dilutes the KHC common shareholder. If Berkshire invests into a pref or a convertible, that too is dilutive to the KHC common. Same with any mezz and debt incurs interest expenses and must also be repaid. Financing generally does not come free (especially from Berkshire).

  First, there are many ways to create value, you do not need organic growth.  In fact, by not having organic growth possibly opens up the door for large repurchases at attractive prices.  If I had a position I would prefer organic growth (assuming it was profitable) but as an investor my best performing investment (in dollars and percentages) by a wide margin was in a business with no unit growth and the almost certainty of long, and steady shrinkage.
I agree in spirit. Everything at a price - the right price. With a $100 billion capital stack (debt +mcap), I'd personally want a lot more unlevered free cash flow to be coming out of this business than what it is currently spitting out (or what it was spitting out last year) before going long.

  Additionally, I see widespread negativity directed at businesses where acquisitions are relied upon to create value.
I am not a fan of generic blanket indiscriminate negativity with regards to anything, but CPG headwinds are (IMO) formidable. I also think roll-up / acquisition stories have a tendency to work better in the early stages. It becomes harder to move the needle later on and find willing targets at larger sizes.  In general, it is hilarious how the market swings back-and-forth between  "break things up" and "put them back together again", especially in CPG and chemicals.  There are people who think KHC should re-merge with MDLZ.  LOL.

I am surprised that people arent instead talking more about the opportunity here with this all star board, 3G management, Buffett's backing and the history of success of all these actors. 
I am a huge fan of Lemann, Telles, Sicupira, Brito and a lot of their crew (seriously).  I just suspect that sometimes in life certain strategies work particularly well in certain conditions and certain time periods, and that some (many?) things are cyclical.  E.g. it is great to be Glencore or Noble in the 2005-2011 commodities bull market; do I think Glencore or Noble are dumb? No.

I also think that when some investment opportunity is too hard, why bother acting on it.  And finally, just because something has Buffett's stamp of approval, I don't automatically consider it to be a great investment and above any critical discussion (over the past 3/5/10 years, has $KO been a great investment for a PA investor or a PM of any fund below say $10 billion AuM?). We'll see what happens.
« Last Edit: April 18, 2018, 04:29:55 AM by Contra123 »
Disclaimer: Regular guy. My takes are reliably bad & I am the ultimate contrarian indicator.

scorpioncapital

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Re: KHC - Kraft Heinz Co.
« Reply #52 on: April 18, 2018, 01:58:12 AM »
Basically the question is do you see KHC as an IBM or a SHLD? A value trap of declining business while trying to extract as much value as possible with what remains? I would say KHC has some advantages. It's a more understandable and simple product, not as fast changing as service outsourcing. And it certainly is better than a failing retailer. Having said that I can see some echoes of similarities in terms of commoditized food products, changes to consumer preferences, proprietary brands, and difficulty to enter European markets where there are so many quality choices generically available for a long time,  although I do see KHC is also now making gluten free products and jumping on the bandwagon.

Spekulatius

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Re: KHC - Kraft Heinz Co.
« Reply #53 on: April 18, 2018, 04:27:56 AM »
^ Very good thoughts from Contra123. A belated welcome to this board!
To be a realist, one has to believe in miracles.

CorpRaider

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Re: KHC - Kraft Heinz Co.
« Reply #54 on: April 18, 2018, 05:09:53 AM »
I like it, but not at this price.

DanielGMask

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Re: KHC - Kraft Heinz Co.
« Reply #55 on: April 18, 2018, 06:24:04 AM »
ďMany shall be restored that now are fallen and many shall fall that now are in honor.ď Horace.

Good management always beats regular or bad management. Current market trends in this specific niche of the CPG category are complicating short term results, but I donít think this is a bad company nor one declining long term.

Kraft has eight billion dollar brands, five 500M dollar brands and another 25 brands with sales between 100M-500M. Management is good with a track record to prove it, major shareholders are business savvy and friendly for shareholders and financing is well structured and of long term duration, with most of the debt maturing after 2023.

At current prices itís not a steal, but I donít think itís expensive either.
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Contra123

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Re: KHC - Kraft Heinz Co.
« Reply #56 on: April 18, 2018, 07:15:04 AM »
Good management always beats regular or bad management.

I like Bernardo Hees. The operational track record over the past 5 years is undeniably good (particularly if you focus on margins). But how do you define 'good management'? Do you not find it concerning that pretty much the entire senior management team of KHC has no CPG experience prior to being parachuted into KHC from 3G or the Brazilian rail/logistics company ALL? Many are relatively young people with classic finance backgrounds (IBD/PE/MBA). Can you achieve decent long-run EBITDA growth in a CPG business if that business is run by people with no long-term track record of rising up the ranks of CPG companies? (Of course, to be fair, these concerns re KHC/3G have been consistently floated for years now, and until recently, you would have done well by fading them and investing anyway.)
Disclaimer: Regular guy. My takes are reliably bad & I am the ultimate contrarian indicator.

DanielGMask

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Re: KHC - Kraft Heinz Co.
« Reply #57 on: April 18, 2018, 07:58:24 AM »
Good management always beats regular or bad management.

But how do you define 'good management'? 
1) Capable of running the business without risking long-term future, 2) Able to keep profitability at a level attractive relative to what was invested, and 3) Capable to reinvest either organically or via acquisitions without destroying capital while doing it.

I think they have it!

Do you not find it concerning that pretty much the entire senior management team of KHC has no CPG experience prior to being parachuted into KHC from 3G or the Brazilian rail/logistics company ALL?
No, I donít. About 9 years ago I was a proven hotel developer and operator without any experience developing and selling apartments. I thought that they were logically related because of my experience building and obtaining permits, so I decided to give it a try. It took me 2 years to gather the backing necessary to start that new venture. Seven years later I consider myself a proven developer of hotels as well as apartment buildings, but at that moment a lot of people was scared to commit money to any fund managed by me that wasnít hotel related.

I think that 1) when you get in an industry that makes money, 2) have experience managing companies (in this case big public companies), 3) have access to capital at competitive costs, and 4) are business savvy, you will learn whatís necessary to compete even though the road may not be as straightforward as youíll like.
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